Analysts at KBW have reported that 1/1 renewal negotiations for property and casualty (P&C) business are running “very late” as reinsurers have managed to remain disciplined on pricing in the lead-up.
After meeting with several reinsurance company executives in Bermuda, KBW analysts are anticipating “solid rate increases overall” for P&C business at January 1, with “occasionally dramatic” increases for some loss-impacted accounts.
One executive told KBW that less than 10% of renewals have been signed so far, in what the firm sees as a positive omen for reinsurance pricing at the crucial renewal season.
Although late renewals can sometimes reflect cedent confidence, KBW believes the meaningful reduction in retrocessional (particularly aggregate retro) capacity that largely comprised ILS capital in recent years will sustain property catastrophe price discipline through the 1/1 period and possibly beyond.
In contrast, there is significant capacity available at the right price for occurrence protection (especially higher layers), which implies that even though renewals haven’t been orderly so far, most programs should ultimately get filled.
Executives also informed KBW that reinsurance demand is expected to be stable overall, with cedants unlikely to materially raise their retentions despite significant primary rate increases to date.
However, the discussions also signalled a significant pullback in ILS capital, reflecting significant losses, trapped capital, and recurring underperformance in four of the last five years driving some investors to exit the ILS asset class altogether.
Interestingly, KBW says several executives mentioned growing ILS investor interest in longer-tailed insurance lines, which offer less diversification from financial market risks than does catastrophe reinsurance, but higher expected returns following several years of compounding rate increases.
Additionally, reinsurers reported that their pricing and reserving assume that financial and social inflation will remain elevated through 2022 at least, due to supply chain disruption, labor shortages, re-opening courts, and widespread ‘resentment’ that probably informs elevated jury verdicts.
In other points of note, KBW found that executives are generally expect ceding commissions to rise, reasonably reflecting the expected profitability improvement from recent years’ significant compounded rate increases, particularly for cedents writing specialty and casualty lines that have experienced the biggest rate increases, and bigger cedents that can theoretically retain more of their gross premiums.
Reinsurers are also expecting to increasingly lend reinsruance support to rapidly growing insurtechs, albeit with carefully managed aggregate exposure until these cedents prove their underwriting skills.
On M&A, most leaders anticipate limited near-term industry consolidation, KBW noted, since likely sustained rate increases imply potential organic growth without enduring the distractions inherent in M&A, and since relatively low valuations limit the attractiveness of their currency.
And finally, analysts reported that virtually all the executives they met with had experienced no meaningful impact to operations or expenses from above-average reinsurance broker mobility, whether to long-established or newly formed competitors.